WEALTH HEALTH: Long-time fund shuts down as both a winner and legendary loser

ck Jaffe / For The Patriot Ledger

Friday

Jul 6, 2018 at 7:50 PM

One of the worst track records in mutual fund history will go away this summer when the 53-year-old Gabelli Mathers fund is dissolved in August.

As it departs, however, there is a real question as to whether it will be remembered as one of the worst funds in history or as the “best of the worst,” a fund that beat its peers mostly by losing less than the competition.

Yes that sounds confusing, but while Mathers is a unique fund, its situation – with investors never knowing quite what to make of it – is not that uncommon in the fund world. Investor portfolios are littered with funds that “were good to me once,” and Mathers was that kind of fund.

It was opened in August 1965 by its namesake, Tom Mathers; current manager Henry Van der Eb took the helm in 1974. In the era before mutual fund ratings – and then as data from companies like Lipper Inc. and Morningstar Inc. changed the way investors viewed funds – Mathers built a reputation for succeeding when others failed.

In 1987, Lipper pegged Mathers as the top-ranked growth fund, gaining 27 percent in the year of the Black Monday market crash. Money flooded in and the fund stayed on top as the market dragged into 1988; Mathers repeated its success when the market sagged in 1990, ranking first among general-equity funds with more than $20 million for the year.

When the market was rising, however, Mathers lagged.

Badly.

When the fund was sold to the Gabelli Asset Management in June 1999, it held virtually nothing in stocks and was performing worse than most money-market funds. In the decade prior to the sale, Mathers posted an annualized average gain of 2.9 percent, compared to an 18.4 percent average annual gain for the Standard & Poor’s 500 Index.

Mathers’ long-term record by that point was so dismal that it was rivaled only by the Ameritor and American Heritage funds, widely recognized as the worst mutual funds ever. I wrote a column in June of 1999 questioning the sanity of legendary fund investor Mario Gabelli for buying the fund.

But Gabelli knew what he was buying, and it was more than just an office in Chicago (which he also wanted at that time).

“The Mathers fund was different,” Gabelli recalled last week, “from almost all other funds of the day. Nobody knew what to make of it, but it was a good fund for us. It is Henry’s decision to close it, or I’d be keeping it open.”

That might be a surprise given the fund’s record since Gabelli acquired it. It remained good during times of the market turmoil, topping Morningstar’s “conservative allocation” category in 2008, with a gain of 0.2 percent compared to a loss of 37 percent for the S&P 500.

By June 20 this year, when liquidation plans were approved, the fund had an annualized loss for the last 15 years of 4.72 percent, compared to the S&P’s gain of 9.2 percent. According to Mathers’ own annual report at the end of 2017, a $10,000 investment in the fund made when it opened in 1965 was worth $195,153 by Dec. 31, 2017; the same amount invested in the S&P 500 was worth $1.48 million.

In short, on the five-decade scale from one to disaster, Mathers Fund is a financial Chernobyl, a nuclear wreck.

But here is where the legacy gets strange, because over the last 15 years, despite the annualized losses, Morningstar had Gabelli Mathers as the top performing active bear-market fund in the category. In fact, it could be said that Van der Eb actually is going out on top, ranked number one in his peer group over the last five, 10 and 15 years.

It’s important to note that the peer group for the Mathers fund has changed over time. It was a “growth fund” during the 1987 crash, and was lumped in with general-equity funds in 1990; in 2008, it was a conservative-allocation fund. For years now, as the ratings agencies found more ways to cut the pie, Mathers has been seen as an active bear-market fund.

“I haven’t been bullish in many years … I haven’t had a long position that I can remember in the last 10 years,” Van der Eb said in an interview. “You have to accept whatever label the ratings companies put on you … Since they made the bear-market label, the fund has always been good compared to the competition.”

Van der Eb decided to close the fund now because “the math is too onerous to continue” with just 7.4 million in assets left. The fund peaked at more than $500 million after the 1987 crash. The 73-year-old manager is not retiring; he remains active within Gabelli Asset Management.

Van der Eb acknowledges that after his last great success in 2008, he whiffed in 2009 (and every year thereafter), misjudging the impact that quantitative easing would have on the bull market.

In his own mind, Mathers was supposed to do the inverse of the S&P 500, so it’s a win whenever the fund is down less than the benchmark is up. Thus, his 4.7 percent loss over the last 15 years is a significant win when stacked up to the S&P’s 9.2 percent gain.

It just doesn’t smell like victory.

Mathers was never categorized in its own prospectus as a bear-market fund; Gabelli Asset Management categorizes the fund as “contrarian.”

The moral of the story: Funds can be just like clothing, so know what you are buying, read the labels closely and make sure something is the right fit.

“At some point, being right – which the manager says he was -- should manifest itself in money coming into shareholders accounts,” said David Snowball of MutualFundObserver.com. “It’s only the number one bear-market fund if you bought it to be a bear-market fund. If you used the fund that way, then good for you, but $7.4 million in assets and years of losses would suggest that no one but Morningstar and maybe the manager will look back and think this was a top-performing fund.”

Chuck Jaffe of Cohasset is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com.

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